Japan cautious on reviving stalled projects, seeks faster debt deal with China

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Japan has asked Sri Lanka to secure a debt restructure deal with China before any discussion on reviving the Light Rail Transit (LRT) project scrapped by former president Gotabaya Rajapaksa, diplomatic sources said.

Foreign minister Yoshimasa Hayashi made it clear during his brief visit to Colombo last week for talks with President Ranil Wickremesinghe that priority must be clinching a debt deal with Beijing before the end of August.

Sri Lanka must have a debt treatment plan ready before the second review of the IMF bailout finalized in March. The release of the second tranche of some $330 million depends on a credible debt restructure plan acceptable to all local and foreign creditors.

“I conveyed my expectations for further progress in the debt restructuring process and stressed the importance of a transparent and comparable debt restructuring that involves all creditor countries, Hayashi said in a statement.

He also welcomed Sri Lanka’s moves to tackle corruption, a key demand of the IMF bailout program.

Sri Lanka wanted more Japanese private investments and a quick revival of the LRT project which was initially estimated to cost about $1.5 billion and fully funded through highly concessionary 40-year loan from Japan. The loan carried an interest rate of 0.1 percent and a 12-year grace period.

The then secretary to Rajapaksa, Punchi Banda Jayasundara and Treasury Secretary Sajith Attygalle who championed the scuttling of the LRT said the project was “not cost effective.”

Officials at the time said they wanted to go with a Chinese developer who had offered to build the LRT at a lower price. However, a “viability charge” in the Chinese proposal meant that Colombo would have end up paying much more than for the Japanese LRT.

Relations between Colombo and Tokyo strained following Rajapaksa’s abrupt cancellation of the LRT in September 2020.

During Hayashi’s visit, the Japanese delegation made it clear that they were cautious about re activating any of the projects given Colombo’s track record of policy inconsistency.

Japan’s Foreign ministry spokeswoman Yukiko Okano also underlined their concerns about opaque Chinese funding and mega vanity projects that got Sri Lanka into a major economic crisis.

Asked if Japan will agree to Colombo’s request for a quick reactivation of the LRT as well as the airport expansion, the central expressway projects, Okano made it clear that they were all “stopped.”

“We will keep discussing (about) these projects with the Sri Lankan government, but in order to make a decision on the new lending for example, then it has to come after the debt restructuring.

“And I think private sector is also watching very carefully how this restructuring process goes forward, because otherwise they also have a stake in this.”

Japan’s main concern about China’s growing presence in Sri Lanka was its funding of mega projects and not so much the increased naval presence in the Indian Ocean region.

“In this region, I think it’s more to do with the big infrastructure projects and we have nothing against you know, Chinese helping other countries to build infrastructure, but as I said, these infrastructure financing has to be in accordance with the international rules, for example on transparency of the terms of the loans or, for example, the labour.

“Using the local labour or using local materials or, you know those standards and as long as their projects comply with these international standards, I think we are fine. But if not, then we have a concern.

“I’m not naming a specific project, but I think this concern is shared not only with the OECD countries, but maybe with the recipient countries too.”

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